Yesterday, the U.K. Treasury announced a set of general principles directed at future applicants to its recapitalization plan that was announced last month. Specifically, the U.K. Treasury addressed “banks which are currently raising capital (either by an agreement with HM Treasury or otherwise) and which, for whatever reason, may seek to negotiate a substantively new proposal or new agreement with HM Treasury about the terms of any [recapitalization].” Though terms of participation will vary with each institution, the U.K. Treasury has set forth the following general principles for banks interested in the recapitalization plan:
1. Institutions should have a “sufficient buffer of capital” above the required minimums. In assessing recapitalization proposals, the U.K. Treasury, “on the advice of the Bank of England and the Financial Services Authority, would need to be satisfied” that three key objectives are met:
- Maintaining financial stability;
- Safeguarding the interests of taxpayers; and
- Protecting depositors and consumers.
2. There is “no automatic right of access to the [recapitalization] scheme.” “At a minimum” qualification would require satisfaction of the following “high-level conditions” before capital could be offered:
- The institution must have a plan to meet an appropriate level of capitalization, as determined by the FSA in accordance with its November 14, 2008 guidance;
- The institution must have “a sustainable business model and delivery plan”;
- The institution’s “funding profile, sources and mix must be clear, broad-based and sustainable”; and
- The institution’s senior management team must be “credible, with demonstrable ability to deliver the business plan.”
3. Any capital provided under the scheme must “carry terms and conditions that appropriately reflect the financial commitment made by the taxpayer, including in relation to dividend policy, remuneration, lending policy and wider public policy issues.”
4. For any Treasury subscription for, or underwriting of, ordinary equity shares, “the price would be at a discount to either the market price prevailing at the time of the transaction or, if applicable, the placing price agreed on October 13, 2008, whichever is lower. The percentage discount would not be less than the percentage discounts applied in transactions already announced.”
5. For an Treasury subscription for preference shares or other Tier 1 instruments, “the appropriate coupon will be based on prevailing market conditions, with due regard given to the rate at which eligible institutions have announced the issue of such instruments most recently.”
6. Treasury’s fees for any underwriting commitments would be set an “appropriate level,” in light of “fees paid in recent transactions involving eligible institutions.”
7. Any transaction would be subject to the necessary regulatory and legal clearances, and would need to comply with the European Commission’s October 13, 2008 approval of the U.K. recapitalization scheme under EU state aid rules.
8. Any securities acquired by the U.K. Treasury under the recapitalization scheme will be managed “on a commercial basis by U.K. Financial Investments Ltd (UKFI).”